Granting Credit & KYC
Money cost money. Credit is money. Hence, credit cost money!
 
Credit also carries an element of risk - the risk of being paid late or not paid at all!
 
But can a firm survive in today’s business scenario without granting credit to its customers, if customers are perceiving credit as a critical factor when purchasing their products and services from their suppliers?
 
Nonetheless, can a firm grant credit blindly to its customer?
 
 
Know Your Customer, or as it is well known KYC, has become more of a cliché in our daily business language. KYC is however, an important task that every credit practitioner should take seriously in order to grant credit profitably, secure sound cash flow and mitigate the risk involved in credit. But what does KYC really mean in practical credit practice terms and in the day-to-day duties of the credit practitioner?
For credit management purposes, having the basic details of the customer do not mean that the KYC task is fulfilled. Before granting credit, the credit practitioner should know not only the name, identification number, business address and contact details but also the business history, culture and the business environment of the customer. In other words, the credit practitioner should acquire enough information on the business of the customer which is needed to analyse the credit worthiness of the customer as appropriate.  
In today’s business world, people involved in credit management should possess good interpersonal skills that complement numeracy and literacy. They should be willing and able to build long-term customer relationship; to integrate and work in synergy with their colleagues and peers, to keep themselves motivated at all times and above all, to understand and meet customers’ expectations and needs.
 
An efficient credit department having the scope of meeting today’s commercial challenges has to be people-driven and should also be an integrated business unit within the business organisation. The level of effectiveness of a credit function determines the level of cash flow management of the organisation, and to an extent, the profitability of the whole organisation.
 
Nonetheless, credit costs money and has an element of risk attached to it. Therefore, credit decisions should be taken wisely and professionally, taking into consideration the internal and external business environmental factors, which very often is taken frivolously by many suppliers selling on credit!
 
The only way to take effective, profitable and competitive credit decisions, as well as to manage risk associated with credit is basing credit decisions on accurate and timely information – Know Your Customer!


Is this information enough?
 
If a supplier wants to analyse the credit worthiness of a customer properly and profitably, this information is surely not enough as it only constitutes the basic details of the customer. For a firm to grant or extend trade credit to customers, it requires far more information about the customer and the market that the customer operates in.
 
In actual fact, the credit worthiness of customers depends on a number of factors both within and also outside their business organisation:


Internal Factors
 
 
 
 
 
 
Internal Factors affecting the credit worthiness of trade customers
Strength in the market – any branded products on offer
 
Financial Assets – profit, working capital
 
Physical Assets – property, facilities & tools
 
Operational Assets – systems, processes
 
People Assets – skills of employees
 
Systems Assets – infrastructure, systems
 
Customer-based Assets – markets and market share
 
Distribution-based Assets – channels to reach customers
 
Cost structure Assets – economies of scale
 
Innovation Assets – internal culture supporting innovation
 
Process Skills Assets – employees flexibility, communication
 
Alliance-based Assets – agreements with third parties
 
Fig 3. Internal Factors (Adapted from: Hooley et al., 1998)
External Factors
 
 
 
 
 
External Factors affecting the credit worthiness of trade customers
Political & Legal factors – Legislation & Regulations, government stability, etc.
 
Economic factors – disposable income, interest rates, inflation rates, unemployment rate, level of demand, etc.
 
Socio-cultural factors – education, skills, work behaviour, attitudes & values, etc.
 
Technological factors – infrastructure, systems, etc.
 
 
Competition – level of competition, branding, pricing, positioning, etc.
 
The customer – bargaining power, perception, expectations, changing needs, communication systems, etc.
 
Market trends – changes in the market, reasons and drivers for change, etc.
 
Fig 4. External Factors
 
 
What are the sources of information?
 
Depending on the industry and market, a firm has a number of sources from which information on its customer can be obtained and actually verified for the purpose of granting /extending credit.
 
One should appreciate that the amount of time and resources required to collect, assess and analyse the information and then putting it in practice can be considerable. Therefore, it is recommended that the credit practitioner identifies clearly what information is needed to grant and manage credit profitably and to improve the processes and procedures when granting and managing credit.
 
Since there are no two organisations alike, each organisation has its own credit information needs and hence, every credit manager needs to identify the proper sources of information which best suit the specific needs. Some of the sources which are available to the credit manager may well include:
 


Knowing your customer should be an ongoing management process and should not stop once credit has been granted to a customer.
 
 
Monitoring your Customers
 
 
Finally, it is commendable to remember that change has become today’s business mantra.
 
The world is changing, the commercial environment is changing, the needs and expectations of customers are changing and these changes are affecting businesses in the way they trade and relate with their customers in the supply chain. The consequence of all this is that customers are changing – Hence, a ‘profitable’ customer today may not necessarily mean that will remain ‘profitable’ forever! Creditors should constantly monitor their customers’ credit worthiness.
 
Therefore, creditors should strive to be proactive and maintain long-term business relationship with their customers. They should continuously and consistently seek to learn more about the customer and the changing dynamics of the marketplace that the customer operates in.
 
Continuously learning about your customer is one of the fundamental ingredients of the recipe for business success.
 
 
References:
 
Hooley, G.H., Sounders, J.A. and Piercy, N.F., Marketing Strategy and Competitive Positioning, 2nd edition, Prentice Hall, 1998
 
  • Josef Busuttil
    Josef Busuttil
    MBA (Henley), DipM MCIM, FCICM

    Josef is the Director General of the Malta Association of Credit Management and Vice President of the Federation of European Credit Management Associations. He is also a Credit Management Lecturer and Coach. He obtained his MBA from Henley Management College, Member of the Chartered Institute of Marketing (UK) and Fellow of the Chartered Institute of Credit Management (UK). He has contributed with intuitive workshops and presentations addressed to various business people worldwide. Josef is a regular contributor of business articles to business press.

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